About Me

greekdefaultwatch@gmail.com
Natural gas consultant by day, blogger on the Greek economy by night. Trained as an economist and political scientist. I believe in common sense and in data, and my aim is to offer insight written in language that is clear and convincing.

20 September 2005

Petroshenanigans

It is inauspicious to find oil making the front pages—usually it spells trouble. Surging prices have been propelled by the Chinese dragon’s vociferous demand for oil and the fears that supply could be disrupted by political turmoil or terrorist attack. The net effect has been noticeable, particularly on roving drivers who are forced to rethink their transportation patterns. But while this price hike underscores some of the oil industry’s weaknesses— particularly low investment and unequal attention to upstream and downstream activities—it also underlines a hard truth: that an oil cartel might be an essential component of the industry’s structure.As a matter of principle and practice, I favor free markets: there is no doubt that if the oil market were to ever approach what would resemble a normal market, both the industry and consumers would benefit. But for geopolitical and economic reasons, this is unlikely. What is more, the oil industry lives with long-term investments that have to be made based on future projections of oil demand; these are always subject to change, making the permanent matching of supply and demand a very tricky and inexact science.That brings us to OPEC (or any oil cartel for that matter). OPEC’s modus operandi has been to restrict supply by not marketing oil it could produce. (This is different than not producing oil because of lack of investment.) While this raised prices in the short term, it offered the market some stability and predictability that prevented prices from spiking too much by allowing OPEC to release oil short term and help demand find its supply. All the same, OPEC has its failings. Its spare capacity, it turns out, consists largely of heavier crude oil, which is not what the market needs right now. And most countries (save Saudi Arabia) have been operating at near full capacity for many years—a sign perhaps that more investment should have been in the offing. But while OPEC’s practices may have been suboptimal, the idea of an oil cartel that maintains spare capacity even for the sole purpose of raising prices, might not be an undesirable second best alternative to a truly free market. Think of these higher prices as the premium that consumers are paying for relative stability in the supply of oil.Of course, this is the most benign view of OPEC that one can conjure up. But it is in difficult times that one is forced to think of—and remiss—of the good old days when oil was cheap; and what is life, after all, if one cannot put in a good world for such lowly regarded people as the ministers who make up the OPEC cartel?